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This Sunday sees the culmination of the National Teachers Awards weekend, with a televised presentation of prizes. This seems very appropriate – in terms of the impact on learning outcomes, hardly anything matters as much as having a good teacher. This is not an empty platitude – research shows that the effect size of having effective versus ineffective teachers is very large relative to most educational interventions. For example, in terms of higher grades achieved, having more effective teachers beats smaller class sizes.

So where do good teachers come from? Are they born or are they made? Research undertaken here and in the US can throw some light on this.

First, the evidence shows convincingly that being a good teacher does not come with experience. Student progress improves for the first two years of a teacher’s career, but not thereafter. It seems that, after the first two years at least, good teachers have always been good teachers.

Second, having the kind of intelligence that is measured by a good university degree really doesn’t matter. CMPO evidence for England shows that a teacher’s effectiveness was uncorrelated with the degree class that s/he obtained. This finding mirrors others from the US: the skills needed to be a great teacher are just different to those needed to pass degree exams. The best teachers perform well across age ranges and abilities of pupils, and are capable of showing regard for the student perspective, which highlights why cognitive skills are not particularly important.

Some recent intriguing evidence from the US correlates teaching styles with the new measures of teacher effectiveness used by economists. If supported by further studies, this offers the hope that researchers can identify how good teachers teach and emphasise these elements in teacher training. Before that time, good teachers are essentially born not made.

More generally, it seems that picking a good teacher pre-hire is hard. Writing in the New Yorker, Malcolm Gladwell asked ‘Who do we hire when we can’t tell who’s right for the job?’. He described the teaching profession as: “There are certain jobs where almost nothing you can learn about candidates before they start predicts how they’ll do once they’re hired.” US economists Kane and Staiger suggest that we need to try out four candidates to find one good teacher. Gladwell suggests that, given cognitive skills are relatively unimportant, we should lower entry standards to “having a pulse and a basic college education”. As he says: “We should be lowering [standards], because there is no point in raising standards if standards don’t track with what we care about.”

We should rightly celebrate the star teachers, even if we don’t know much about how we found them, or how to make some more.

In one sense, George Osborne said very little about the Big Society in his speech last week. He mentioned it only once, near the beginning when he announced that there would be “additional allocations to support the Big Society, establish community organisers and launch the pilots for the National Citizen Service”. Yet in his many ways, his speech spoke volumes about the Conservative’s Big Society vision.

A key part of the Big Society is involving not-for-profit organisations in the delivery of public services. This is something that the previous Labour government was also keen on. But if the Labour government had a vision, it was of a “top down” Big Society; i.e. government funding for not-for-profits providing public services through grants and contracts. This led to a big increase in the amount of income that charities received from the government, up 128% since 2000/01 and an expansion in the sector – from 120,000 charities in 1994/95 to 171,000 in 2007.[1]

Even before the public spending cuts, some Conservatives rejected this top-down approach. Ian Duncan-Smith criticized what he called the “Big charity, Big government” duopoly. Contract funding, he argued, favoured big charities, although the evidence shows that large charities have not become any more dominant over the period since 1997. He also argued that it threatened to erode the very thing that gave not-for-profit organisations their edge – their “mission”.

And now much of this government funding is under threat. The Government has allocated £100m to a transition fund to help voluntary and community sector organisations deal with the changes as part of the CSR – but this is dwarfed by the size of the cuts – an estimated £5 billion according to the Charity Commission. New Philanthropy Capital have predicted that community development, financial exclusion, and parenting work charities will be particularly hard hit.

Instead, the coalition’s vision is for a Big Society that comes from the bottom up. To replace contract funding, Ian Duncan Smith called for more volunteers with “fire in their bellies” and more stakeholder-led funding: more genuinely voluntary activity from the voluntary sector. But can this really deliver?

It rests on the belief that “bottom up” is better than “top down” as a way of involving not-for-profit organisations and ensuring public services that meet local needs most efficiently and effectively. Individual donors and volunteers have local knowledge, they have commitment and vision and they can personally derive enormous benefits from engaging with local not-for-profit organisations. But there are also risks: that the geographic and service spread of bottom-up services may be patchy and un-coordinated, that pure voluntary funding may be unreliable compared to government money, and that it may come with ideological strings attached. These risks are particularly great at a time when demand for services is likely to increase following cuts announced in the comprehensive spending review to housing benefit, disability benefit and support for families with children.

The bottom up approach is a big leap of faith. Not least, the belief that there is a lot of untapped volunteerism. One of the few economic studies to look at volunteering by Richard Freeman found that a key factor in explaining whether or not people volunteered was whether they had been asked.[2] Perhaps that is all that it takes. But much of the evidence suggests that “pro-social” behaviour is fairly concentrated. In particular, public sector and not-for-profit workers – who tend to do more unpaid overtime (“donated labour”) in their jobs than private sector workers – also typically volunteer more. In the British Household Panel Survey, 35 per cent of people working for not-for-profit organisations said they volunteered regularly compared to 21 per cent of public-sector workers and 12 per cent of private sector workers. So, perhaps the one great hope for the Big Society is that many of these public sector and not-for-profit workers will soon find themselves with much more time on their hands.

In the past, policies have been introduced aiming to incentivise schools and teachers to raise educational attainment. These have been effective to a degree: our evidence shows that performance pay for teachers does raise educational attainment; competition among schools also has some impact, albeit much weaker.

This new policy incentivises students themselves. And in a break from past policies, this scheme directly incentivises students to fail their exams. It is reported that Blackburn College will pay £5000 to each student who fails her/his exams. This intriguing new policy will certainly add to the research evidence on how (not) to raise attainment.

This issue is taken seriously in the US with a number of landmark policy experiments raising attainment for some of the more deprived and low-attaining groups in the country. At Harvard, Roland Fryerreports on the results of a large scale experiment in which students were incentivised in different ways. In some schools students were paid on results, and in some schools they were paid for activities leading towards better results, such as attendance and completing homework. The results were mixed, but the latter class of experiments were effective and cost-effective. Similarly, C. Kirabo Jackson at Cornell has shown that the Advanced Placement Incentive Program in Texas produced some very exciting results from paying 12th grade students for test-passing scores. Such students are more likely to attend college, do better when they attend college and are less likely to drop out. Similar experiments have taken place in the Harlem Children’s Zone

These experiments give us an idea of the value of a policy to incentivise student achievement. As far as I know, Blackburn’s policy is the first chance we have had to study the value of a policy to incentivise student failure.

More seriously, the idea of a commitment device is standard: something that penalises the provider if something does not work out as planned. A long warranty on a car is one way of the manufacturer raising the cost to itself of the car failing. But in a case such as studying for exams, where student effort is so hard to observe, and where good or bad luck can play such a role, what economists call the “moral hazard” problem is very severe.

There are obvious alternatives – the College could pledge to give £5000 to a local charity for every student that fails the exam. That would still appropriately hurt the provider for failure on their part, without giving marginal students a very high temptation for failing at the last.

The coalition government plan to implement substantial cuts in spending on public services, with most departments having been asked to find budget cuts of 25%.The government hopes to achieve these cuts without such radical effects on what it delivers. The up-coming Spending Review aims to make efficiency savings and “to consider how to deliver a step change in public sector productivity”(i.e. the ratio of public sector outputs to inputs).

Public service reforms may deliver genuine efficiency improvements, but even in their absence the spending cuts are is likely to be successful in increasing measured productivity in the public sector. The graph shows the National Statistics measure of public sector productivity from 1997 to 2008. Productivity falls as the increase in inputs outstrips the growth in measured output. As inputs decrease this is likely to be reversed. Measuring the quality of public sector outputs is extremely difficult[1] – just as the numbers may not include all quality improvements as inputs rose, the output measure may miss any deterioration in service quality as inputs fall, leading to an increase in measured productivity.

Source: UKCeMGA: Total Public Service Output, Inputs and Productivity (2010)

With the prospect of public sector pay freezes, quality decreases may arise through talented staff leaving for the private sector. Research suggests that remuneration over the lifetime is roughly similar in the public and private sector with a small public sector premium.[2] Hence there is a risk, with public sector pay frozen, and if jobs become available, that quality will decrease if some of the most able employees go private.

Shifting a substantial fraction of activities out of the public sector, for example to be delivered by charitable organisations, could also increase public sector productivity if those services were relatively resource intensive and low productivity. But then comparing the performance of total publicly-provided services over time, and inherently the performance of successive governments, would not be meaningful as the measure would not be comparing like with like.

This week’s unemployment numbers show a flat labour market. After a buoyant first six months of year, the latest data show flat unemployment and vacancies falling back. The poor unemployment picture is far worse when the numbers working part-time but want full-time work are considered. These people are often called the underemployed, not fully unemployed but working far fewer hours than they would want. The US has a tradition of including the underemployed alongside the fully unemployed to create a broader measure of unemployment but it seems sensible to weight them less because they are working. In addition those who are inactive, because they think there are no jobs to look for, often called discouraged workers, are also added to this broader measure. This broader measure of unemployment, giving the underemployed part-time workers a weight of a half, gives a figure of just over 3 million (3, 066,000), whilst the LFS unemployment measure is just under 2.5 million. Further, whilst the LFS measures showed a small fall in the latest data this broader measure showed a small rise of 16,000. The measure highlights how underemployment, part-time working by those who want to work full-time has help to keep the regular measure of unemployment down through this recession.

However, the bleakness of the current picture can be over-stated. Last Autumn, large numbers of young people stayed in post-16 education rather than look for work, far more than usual and far more than captured by the normal seasonal adjustment of the data would capture. Hence unemployment fell and inactivity (students are mostly counted as inactive) rather than employment rose. This Summer those on one year courses have returned to the labour market partially unwinding last years surge of studying. Hence inactivity has been falling recently and unemployment is flat despite decent jobs growth. This Autumn again we might expect a surge in studying although less marked than last year. This, combined with an expected surge in spending at Christmas ahead of the January rise in VAT, should lead to a more positive story on unemployment. However, this is likely to be short lived and the real jobs crunch will hit early next year with rising taxes and public spending cuts.

The latest proposed spending cutbacks, announced today, are restrictions on the amount of money that can be paid tax-free into a personal pension each year – from £255,000 to £40,000 – and on the amount that can be built up in employer pensions.

While this will be unpopular with the pensions industry, this proposal has a lot to recommend it. There is a strong reason for the government to provide some incentives for people to save in a personal pension. Without tax advantages it is not an attractive form of saving because of its inflexibility – in the UK the money is locked away until retirement and then most of it has to be converted into an annuity (an annual income). This is exactly what the government wants people to do to prevent them from blowing their savings before or after retirement and falling back on the state – as apparently happens in countries such as Australia where annuitization is not compulsory. But without giving extra tax privileges, it is not clear that anyone would choose to save in this way. Following this argument, however, the “right” level of incentives will ensure that people build up a pot big enough to keep them off means-tested benefits (with a bit on top so they feel that the sacrifice has been worth it). There is no particularly strong economic reason to subsidize pensions above this level and allowing people to pay such huge sums tax free into a pension each year favours the better off.

Whether £40,000 is the right limit is harder to say. Means-tested benefits (pension credit) are currently worth £132.60 a week for a single person. You need a pension pot of more than £200,000 to get an annuity that will pay you this amount (for a woman aged 60 buying a single life annuity linked to inflation) – although this is an upper limit since most people will have some state pension that reduces the amount of means-tested benefit they receive. If people contribute to a pension during most of their working lives, the annual limit of £40,000 seems more than enough to reach this level of savings. There may be some, however, who were planning to concentrate their savings in a few good years who will be hard hit. More flexibility in being able to smooth contributions over years would help them.

However, it is less clear that the proposal will generate the type of savings that are currently being talked about – £4 billion a year in the cost of tax relief. These estimates typically assume that the money would otherwise be saved in a fully taxed form of saving – such as regular holdings of stocks and shares or a bank or building society account. This is clearly not the right counterfactual; wealthy savers will be seeking the advice of financial experts on the next best alternative to reduce the amount of tax that they have to pay.

Incentives matter. Our research has shown repeatedly that this is true for the public sector as it is for the private sector: for teachers and schools, for doctors and hospitals and for civil servants. It is very likely also to be true for universities and those of us who work in them.

For the past couple of decades, universities have been very strongly incentivised to improve their research profiles. The evolving formats of the Research Assessment Exercise (now the Research Excellence Framework) have rewarded Departments and universities on the basis of their research output in a high powered way. This has been ferociously effective. As a whole, UK universities have vastly improved the quality and quantity of their research and now stand close to the very top of the international rankings.

One key insight is that while the RAE/REF itself is a collective Department-level incentive, this has trickled down to incentives for individual lecturers and professors. Universities keen to improve their research rating have created a “transfer market” for star researchers, and this has meant that recruitment effort, salary and respect have been focussed overwhelmingly on research ability. Young academics, wanting to get on, are aware of this and so spend their scarce time and energy on research.

This is not necessarily a bad thing – research is extremely important to a nation’s prosperity and cultural wealth. But it does mean that universities and individual academics have been incentivised to spend more time and resources on research than teaching. Does the Browne Review change any of this?

One of the less discussed points in the Browne Review is that new institutions can provide higher education (HE). Obviously, a new start-up university may find it hard to develop credibility for its degrees, but David Willetts, the Minister for universities, has floated the idea that they could teach towards the degree exams of established universities. This has worked in the past, and would give instant credibility to the degrees.

This opens up a range of possibilities. It seems unlikely that any single new institution would attempt to offer degrees across the whole range of disciplines. Instead we might see institutions offering, say, just a BSc in Computer Science, or just a BA in Spanish. This is reminiscent of the Independent Treatment Centres that transformed outcomes in health care; centres just doing cataracts or just hips. Obviously this does not provide the breadth of three years spent in a traditional university – chatting to people outside your subject, quizzing the great researchers in your field – but it would allow students to choose between these options and put a price on those factors.

Would this affect traditional universities, and alter the incentive structure for lecturers there? After all, this is where the bulk of students will be taught for the immediate future. It might. A new source of demand for talented degree teachers would raise their outside option and might force the traditional universities to pay more. The outcome depends in part on the co-production of teaching and research. Are good teachers good researchers, and vice versa, or not? What evidence there is suggests no strong correlation either positive or negative. In which case, there will definitely be an overlap in demand between traditional universities and new providers.

Of course, traditional universities will respond and make clear that their products are different, are distinctive. But they are likely to be more expensive too, and this gives students choices. There is likely to be a lot of innovation in institutional form and contracts following this path. How this will all pan out is unclear – the market for higher education is a complex one.

But it also creates a new market for talented degree-level teachers, and this may spill over into the pay and status of good teachers in universities. This in turn will encourage a re-balancing of lecturers’ effort towards teaching at the margin, and may have a greater impact on the quality of teaching in universities than any increased resources that may flow into the sector.